Managing my mortgage and retirement plan

Oran A. Hall, Gleaner Writer

QUESTION: I am a 54-year-old Jamaican living abroad. I own an apartment in Jamaica and am currently paying a mortgage of $80,000. I rent the apartment for $50,000 and have to send the remainder to pay the mortgage. I now owe a little over J$5 million to the bank.

I am saving to pay a lump sum so that the rent can pay the mortgage, and also to be able to significantly reduce the mortgage. As I am not far away from retirement, with only my savings and my investment, I need your assistance on the following:

1. Would you advise that I pay off all the money owing to the bank, or keep some cash in savings/investment and pay off as much as possible?

2. I also would like your opinion on a good personal-retirement plan which would prove beneficial for someone at my age.

- Beverly

PFA: The two issues you have presented are closely related, though they may not appear so on the surface. Your priority should be to manage your affairs for your long-term benefit.

Although there is such a huge gap between your monthly mortgage payment and the rent you earn on the apartment, you should derive significant gains as its value appreciates.

You do not have to wait until you have a substantial sum to make a lump-sum payment on your mortgage. Several modest payments are just as good, or better than a much bigger one made later.

Making these early payments will free up funds for investment later, whether you pay off the mortgage ahead of schedule or maintain the original schedule with smaller monthly payments.

You can also reduce the risk of default later if you fall upon hard times.

Make the decision that makes you better off in the long run.

Consider if you are making a better return on your funds than the mortgage is costing you, or if you are making non-taxable income on your funds while using post-tax income to pay your mortgage.

Consider also if paying down your mortgage would seriously impair your ability to maintain your current financial obligations and attend to other financial goals.

You need to maintain an emergency fund and have funds to take advantage of investment opportunities that may arise.

At 54, you are virtually at the end of the mid-career phase of your life and are about to enter the pre-retirement phase.

Congrats

Generally, you are at the stage where income is relatively good, debts are relatively low or declining, family expenses are declining as the children grow up and assume more responsibility for themselves, and more funds become available for investment as discretionary income increases.

Although you do not seem poised to benefit from a formal pension arrangement, you do have savings and investments. Congrat- ulations. You are better prepared for retirement than many persons in Jamaica but, because you are not working in Jamaica, you cannot participate in any of the approved retirement schemes which are meant for employed persons who are not members of superannuation groups/schemes.

At this stage of your life, it is important that your investment programme is tax-efficient so that you can maximise your returns. Apart from giving you a better current income, this strategy also gives you more to reinvest, thereby increasing your future returns through compounding.

If you remit funds to Jamaica for saving, consider long-term savings accounts which allow you to earn tax-free interest if the principal is invested for five years and if no more than 75 per cent of interest earned in any year is withdrawn. The maximum sum that may be invested in these accounts each year is J$1 million.

Mutual funds and stocks also facilitate the earning of tax-free returns.

Major setback

Ordinary stock and mutual funds or unit trusts that invest in stock and/or real estate also provide a good hedge against inflation because of their potential for increasing in value. The major setback with them is their potential for generating a capital loss, so you would have to be careful with this approach.

You should focus now on preserving the value of your assets and on shifting from consumption to savings and investment, but how you distribute your funds between the various types of investment vehicles depends on the current value and make-up of your savings and investment portfolio.

Your apartment, if it is for investment purposes, is also an important element of your programme as it is a potential source of income for retirement and a good hedge against inflation and can be sold to provide a reasonable pool of funds to finance your retirement if required.

See a qualified and competent financial planning professional for guidance.

Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers free counsel on personal financial planning.finviser.jm@gmail.com